Thursday, June 14, 2012

Catholic Social Teaching and Economic Justice, IX: Bills and Money

Yesterday we looked at the need for propertyless workers to become capital owners as well as labor owners. The problem is that most workers cannot afford to meet their needs with their wages, much less set aside something with which to purchase capital. Raising wages simply increases prices, usually faster than wages increase, leaving the workers worse off than before.

We find the solution to this conundrum in an application of Say's Law of Markets called "the real bills doctrine." The real bills doctrine relies on the nature of this thing we call "money."

Money is anything that can be accepted in settlement of a debt.

All money is a promise, a contract to deliver the value of some marketable good or service. All money is a contract, just as, in a sense, all contracts are money.

All contracts consist of offer, acceptance, and consideration. "Consideration" is the inducement to enter into a contract — what someone expects to get as a result of entering into the contract.

The key to the financial feasibility of a program to turn owners of labor into owners of capital is the soundness of the method of creating money, an application of classic banking theory.

Creating money involves someone making an offer called a "bill of exchange." The offer is based on the present value of the future marketable goods and services the maker of the offer reasonably expects to produce and sell, backed by his or her "creditworthiness": the confidence on the part of whoever accepts the offer has that the maker of the offer will be able to keep his or her promise.

The offer can be made — "tendered" — to someone who accepts the offer in payment for whatever goods or services the acceptor provides to the one making the offer. In a program of expanded capital ownership, the offer is made to someone who will accept the offer and provide what is needed to form new capital to be owned by the one making the offer. When someone or something other than a commercial bank accepts an offer, it is called a "merchants" or "trade" acceptance. When the offer is accepted by a commercial bank, it is called a "bankers acceptance."

When an offer is accepted by someone/thing other than a bank, it can be used as money in other transactions on indorsement by each "holder in due course," that is, by each person accepting the offer in turn when assured by the previous person who accepted it that the promise is good. ("Indorsement" is the usual spelling in law and finance; "endorsement" is the usual spelling otherwise. Either is generally accepted as correct, though.)

When a bank accepts an offer, the bank issues a promissory note. The promissory note can be used as money, or it can be used to back smaller denomination promissory notes called "banknotes" or a demand deposit.

The first offer and acceptance of an offer — a bill of exchange — is called "discounting." This is because the present value of a bill of exchange is almost always less than the face value at maturity, when the bill must be redeemed. Subsequent transactions involving the same bill are called "rediscounting." A central bank adds a layer of security by rediscounting bills discounted by its member banks and issuing its own promissory notes.

As this is applied in a program of expanded capital ownership, the government or some delegated agency can estimate the amount of new capital formation to take place in a specified period, probably on a quarterly basis. This amount could be divided equally among citizens. Each citizen would get a "voucher" entitling him or her to capital credit in the pro rata amount IF (and only if) a feasible capital investment can be located, usually with the help of a banker or financial analyst.

THIS VOUCHER WOULD NOT BE MONEY. The citizen would take the voucher and make an offer — draw a bill of exchange — to purchase shares in new capital that has been approved by the bank that will provide the financing, and a capital credit insurance company that will provide the collateral in the form of an insurance policy. The commercial bank can then create the money to purchase the new capital by accepting — "discounting" — the bill of exchange and issuing a promissory note to the borrower.

The commercial bank could then take the bill of exchange to a central bank and offer it. Assuming the bill is deemed "qualified paper," the central bank would issue a promissory note to the bank, transferring the borrower's liability on the bill of exchange from the commercial bank to the central bank by replacing the bank's promissory note to the borrower, with the central bank's promissory note to the commercial bank.

As far as the borrower is concerned, he would pay the bank and redeem the debt. The commercial bank, however, must remit the payment to the central bank to redeem its debt to the central bank, canceling the money originally created to finance the new capital.

By applying these principles consistently and democratically, everyone could become an owner of capital, and thus participate in the economic common good to the fullest degree possible, but without having to cut consumption or redistribute wealth belonging to others.